Noranda Income Fund Unit T.NIF.UN

TCs and domestic cons

[Bigbird9999]

Regulars on this board know that I strongly believe that the TC in the new smelter contract should be in the range of $100.  If the board has agreed to the $40 that keeps getting put forward as a "done deal", they have not upheld their fiduciary duty to the shareholders. 

There is no zinc plant anywhere that can operate on $40 TC unless the LME hits $4000.  $40 is the spot TC FOR IMPORTED CONCENTRATE in China which is about 1-2 million tonnes of concentrate short of the requirements of its domestic smelters.  Just today, ZouZou smelter (China's largest) has idled 200000 tonnes (20%) of their refinery capacity citing low TCs.  Korea Zinc announced a cutback of 50000 tonnes for the same reason.  Other's will surely follow with, or without an announcement.

But $40 is the spot price for imported concentrates.  It is not the average TC for all of the concentrate.  The TC of domestic concentrates is much higher.    The same thing is true for any country that mines zinc.  The TC of con processed at a domestic smelter is higher.  One of the reasons for this is freight cost:

Under smelter contracts, the miner pays the land freight cost from the mine to a domestic smelter  (e.g. Kidd to Valleyfield).  If the concentrate is shipped to a non domestic smelter, the miner pays the land freight from the mine to tidewater port PLUS loading and sea freight to the customer's tide water port (Antwerp, Rotterdam, Shanghai, etc.)  From memory the land freight cost of a Canadian mine like Kidd is ~$50 per tonne to tidewater (Trois Rivieres, Montreal, Quebec City) and another $50 sea freight to any tide water port on the planet.  The smelter pays the cost of unloading the concentrate PLUS the land freight from the seaport to the Smelter.  That is why we see “increased freight costs due to seaborne shipments” referenced in the quarterly reports.  This is also the reason why a land locked smelter like Hud Bay that is a $75 train ride from tide water cannot afford to import con.  They are economic only when treating “local” concentrates from surrounding mines.
The miner operates the mine and process to maximize  his NSR (net smelter return) .  NSR = Payable metal + premiums for grade and other metals – freight - penalties for grade or deleterious impurities.  The result is that a miner will always choose to contract with a domestic smelter to treat his cons because he saves about $50 per tonne of sea freight.  The smelter knows this so they negotiate terms whereby the miner and smelter “share” the freight benefit by adding $25 to $50 onto the TC. 
My point is that for a Canadian miner to get those juicy (from the miner’s point of view) TCs he must pay an extra $50 in freight to China on top of the $50 land freight cost.  On this basis alone the $40 TC in China is equivalent to a $90 TC to Valleyfield for Glencore’s Canadian cons.
That is the minimum TC we should be seeing for 70% of the cons. 
 
BB